You've probably heard a lot about bitcoin over the last few
years. But do you truly understand how it works? This article
explains the concepts in straightforward language (like you were 5)
so you'll never be out of the loop again.

We didn’t need a third person there to help us make the
transfer. We didn’t need to pull in Uncle Tommy (who’s a famous
judge) to sit with us on the bench and confirm that the apple went
from me to you.

The apple’s yours! I can’t give you another apple because I
don’t have any left. I can’t control it anymore. The apple left my
possession completely. You have full control over that apple now.
You can give it to your friend if you want, and then that friend
can give it to his friend. And so on.

So that’s what an in-person exchange looks like. I guess it’s
really the same, whether I’m giving you a banana, a book, or say a
quarter, or a dollar bill….

But I’m getting ahead of myself.

Back to apples!

Now say, I have one digital apple. Here, I’ll give you my
digital apple.

Ah! Now it gets interesting.

How do you know that that digital apple that used to be mine, is
now yours, and only yours? Think about it for a second.

It’s more complicated, right? How do you know that I didn’t send
that apple to Uncle Tommy as an email attachment first? Or your
friend Joe? Or my friend Lisa too?

Maybe I made a couple of copies of that digital apple on my
computer. Maybe I put it up on the internet and one million people
downloaded it.

As you see, this digital exchange is a bit of a problem. Sending
digital apples doesn’t look like sending physical apples.

Some brainy computer scientists actually have a name for this
problem: it’s called the double-spending problem. But don’t worry
about it. All you need to know is that, it’s confused them for
quite some time and they’ve never solved it.

Until now.

But let’s try to think of a solution on our own.

Ledgers

Maybe these digital apples need to be tracked in a ledger. It’s
basically a book where you track all transactions — an accounting
book.

This ledger, since it’s digital, needs to live in its own world
and have someone in charge of it.

Say, just like World of Warcraft. Blizzard, the guys who created
the online game, have a “digital ledger” of all the rare flaming
fire swords that exist in their system. So, cool, someone like them
could keep track of our digital apples. Awesome — we solved it!

Problems

There’s a bit of a problem though:

1) What if some guy over at Blizzard created more? He could just
add a couple of digital apples to his balance whenever he
wants!

2) It’s not exactly like when we were on the bench that one day.
It was just you and me then. Going through Blizzard is like pulling
in Uncle Tommy(a third-party) out of court(did I mention he’s a
famous judge?) for all our park bench transactions. How can I just
hand over my digital apple to you, like, you know— the usual
way?

Is there any way to closely replicate our park bench, just
you-and-me, transaction digitally? Seems kinda tough…
The Solution

What if we gave this ledger — to everybody? Instead of the
ledger living on a Blizzard computer, it’ll live in everybody’s
computers. All the transactions that have ever happened, from all
time, in digital apples will be recorded in it.

You can’t cheat it. I can’t send you digital apples I don’t
have, because then it wouldn’t sync up with everybody in the
system. It’d be a tough system to beat. Especially if it got really
big.

Plus it’s not controlled by one person, so I know there’s no one
that can just decide to give himself more digital apples. The rules
of the system were already defined at the beginning. And the code
and rules are open-source. It’s there for the smart people to
contribute to, maintain, secure, improve on, and check on.

You could participate in this network too and update the ledger
and make sure it all checks out. For the trouble, you could get
like 25 digital apples as a reward. In fact, that’s the only way to
create more digital apples in the system.

I simplified quite a bit

…but that system I explained exists. It’s called the Bitcoin
protocol. And those digital apples are the “bitcoins” within the
system. Fancy!

So, did you see what happened? What does the public ledger
enable?

1) It’s open source remember? The total number of apples was
defined in the public ledger at the beginning. I know the exact
amount that exists. Within the system, I know they are
limited(scarce).

2) When I make an exchange I now know that digital apple
certifiably left my possession and is now completely yours. I used
to not be able to say that about digital things. It will be updated
and verified by the public ledger.

3) Because it’s a public ledger, I didn’t need Uncle
Tommy(third-party) to make sure I didn’t cheat, or make extra
copies for myself, or send apples twice, or thrice…

Within the system, the exchange of a digital apple is now just
like the exchange of a physical one. It’s now as good as seeing a
physical apple leave my hand and drop into your pocket. And just
like on the park bench, the exchange involved two people only. You
and me — we didn’t need Uncle Tommy there to make it valid.

In other words, it behaves like a physical object.

But you know what’s cool? It’s still digital. We can now deal
with 1,000 apples, or 1 million apples, or even .0000001 apples. I
can send it with a click of a button, and I can still drop it in
your digital pocket if I was in Nicaragua and you were all the way
in New York.

I can even make other digital things ride on top of these
digital apples! It’s digital after-all. Maybe I can attach some
text on it — a digital note. Or maybe I can attach more important
things; like say a contract, or a stock certificate, or an ID
card…

So this is great! How should we treat or value these “digital
apples”? They’re quite useful aren’t they?

Well, a lot of people are arguing over it now. There’s debate
between this and that economic school. Between politicians. Between
programmers. Don’t listen to all of them though. Some people are
smart. Some are misinformed. Some say the system is worth a lot,
some say it’s actually worth zero. Some guy actually put a hard
number: $1,300 per apple. Some say it’s digital gold, some a
currency. Other say they’re just like tulips. Some people say it’ll
change the world, some say it’s just a fad.

I have my own opinion about it (and you can check out the link
in the original article).

That’s a story for another time though. But kid, you now know
more about Bitcoin than most.

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